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if we see an increase in default rates, what may that mean for the junk bond market and for companies that want/need to sell more junk bonds?
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- Without the threat of inflation, an increase in the money supply could reduce interest rates and bond prices would increase. Thus, bond portfolio managers would purchase more bonds now, causing immediate upward pressure on bond prices. True or False?Assume that inflation is expected to rise soon. How could this affect future bond prices? Would you recommend that financial institutions increase or decrease their concentration in long-term bonds based on this expectation?Explain how does a bond par value differs from its market value? Are variable rate bonds attractive to investors who expect the interest rates to decrease? Explain. Would a firm that needs to borrow funds consider issuing variable rate bonds if it expects interest rates to decrease in the future? Explain.
- Would you recommend that financial institutions increase or decrease their concentration in long-term bonds based on this expectation that the inflation is expected to decline in the near future? Explain.After a bond has been issued, its value will fall if interest rates in the economy rise. What is the reason for that?Which of the following statements is CORRECT? a. If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices. b. The total yield on a bond is derived from dividends plus changes in the price of the bond. c. Bonds are generally regarded as being riskier than common stocks, therefore bonds have higher required returns. d. Bonds issued by larger companies always have lower yields to maturity (due to less risk) than bonds issued by smaller companies. e. The market price of a bond will always approach its par value as its maturity date approaches, provided the bond's required return remains constant. THE ANSWER IS NOT E OR B, apparently, but please let me know if you really think one of those choices are correct.
- Long-term bonds fluctuate more than short-term bonds as interest rates rise, making them a riskier investment. When interest rates rise, bond prices fall. A bond's coupon rate or interest rate determines the annual payment to the issuer. what does this mean?How would a financial institution with a large bond portfolio be affected by falling interest rates? Would it be affected by a greater degree than a financial institution with a greater concentration of bonds (and fewer short-term securities)?If you expect interest rates to rise, do you want to buy bonds now?
- Assume that breaking news causes bond portfolio managers (fixed income portfolio managers) to suddenly expect much higher economic growth. How might bond prices be affected by this price expectation? Why? Is this called a bond rally? If portfolio managers suddenly anticipate a recession, how might bond prices be affected? Why do you think so?Suppose that the Fed wants to lower long-term interest rates and buys all the Treasury securities banks hold. Reflect those changes on the balance sheet (commitment to low long term interest rate environment, QE)If you buy a callable bond and interest rates decline, will the value of your bond rise by asmuch as it would have risen if the bond had not been callable? Explain.
